Recap mulled for DC project

Real Estate Alert, May 19, 2004

Large stakes in the office and retail portions of a complex under construction in Washington could soon be up for grabs.

A development group is exploring the possibility of recapitalizing the $275 million project, located on the southeast corner of 7th and H Streets NW. The property, called Gallery Place, will consist of 263,000 square feet of retail space, 210,000 sf of office space and 192 residential condominium units.

The construction is being overseen by two of the group's four partners: local players John Akridge Co. and Western Development. Most of the equity is being supplied by the other two partners: AFL-CIO Building Investment Trust and Cornerstone Real Estate Advisors, which is the institutional advisory arm of Massachusetts Mutual Life.

Akridge and Western have hired Eastdil Realty on an unpaid basis to advise them on their options while they continue to pre-lease the property, which is scheduled to be completed in September. Eastdil, which declined to comment, would presumably get any listings. The brokerage beat out Holliday Fenoglio Fowler and Cassidy & Pinkard for the advisory role.

The group could decide to sell large stakes in the office and retail portions, which are valued at about $230 million. Akridge and Western would likely retain a minority interest and manage the property.

AFL-CIO and Cornerstone might also remain in the partnership.

The group might instead decide to refinance the project. The property is currently encumbered by $123.8 million of construction loans.

The office space has not been pre-leased, and whether tenants are found soon might dictate the partnership's route. The group might try to sell the space to one or more owner-occupiers. Or it could try to lease the office portion--the triple-net asking rents would be $30-$34/sf--and then market it.

Some 95% of the retail space has been pre-leased, at triple-net rents of up to $150/sf. Tenants include Aveda Institute, Ann Taylor Loft, Urban Outfitters, Benetton/Sisley, Washington Sport and Health Clubs, City Sports, BB&T Bank and a 14-screen Regal Cinema.

The residential condos are being sold separately. The top units could fetch more than $400,000.

The 11-story property, which includes a 690-car garage, is adjacent to the Gallery Place-Chinatown Metrorail station and the MCI Center sports arena.

Akridge and Western have invested about $20 million of total equity in the project, with AFL-CIO and Cornerstone each kicking in $29 million. The financing is rounded out by the construction loans, as well as $73.7 million of District of Columbia Tax Increment Revenue Bonds, which will be paid back from sales taxes generated by the property's retail space.